Long Haul Awaits India's Retailers

By

Shruti Chakraborty

Updated Aug. 2, 2011 10:34 a.m. ET

The new proposal from cabinet secretaries to bring retail to India is a positive move that will transition India's retail to the next generation, says Anand Ramanathan, Manager at KPMG India in an interview. However, there are challenges, he adds. Edited Excerpts:

Deals India: What do you think of the proposed changes to FDI in retail? Broadly speaking, do you think it goes far enough?

Mr. Ramanathan: It's not a law as yet, just a set of recommendations passed by a committee of secretaries and it will take another three months at least for the committee to give a nod. My initial reaction: I welcome it. This is possibly the best-case scenario we could have in the current circumstances, so even the constraints per se aren't particularly constraints.

If you look at retailing in India, it is primarily out of these 'over 10 lakh (100,000)' towns or one million towns. So de facto a player would not go to a location which is below one million in terms of population, which is mentioned in the recommendations. Again in terms of size they have mentioned $100 million. It does not make sense for anyone to come into India especially in multi-brand for below that. That is also therefore not a big constraint.

Deals India: However, allowing foreign entrants into retail is likely to have its opponents. After the sector is opened do you think companies will face hurdles and challenges at many levels?

Mr. Ramanathan: My own independent assessment is that opposition is not at the level that we expected. Yes, the biggest opposition party has objected to it, but in terms of actual consequential steps they have taken, nothing tangible has happened. So net-net it is a fairly positive reaction.

Amongst challenges they face, the biggest challenge will be basically on the supply side, supply chain infrastructure really needs to be overhauled in the country for foreign players, contract manufacturing, cold-chain storage, procuring fresh produce etc. Also a problem will be real-estate costs. For example in a place like Bangalore (where real-estate costs are high), stores may find it hard to break even. Another problem: Many states will have different regulations, and it will take the stores some learning to deal with all these issues. Inefficiencies in the system may result in inefficiencies in the stores' operations.

Deals India: Can you elaborate on the terms of the proposal?

Mr. Ramanathan: Only point of diversion in the committee was between 49% and 51% and by a majority they have gone ahead with a 51% level. Overall, if you look at the document it's fairly generic. There will be some state level legislation that will govern the produce side. A lot on the fresh produce will be governed by the local (Agricultural Produce Market Committees Act), so though it is not mentioned in the notifications specifically, a lot of sourcing will be dependent on state-level tariffs and regulations. The implication would be these retailers would carry fresh produce.

Then there is also something on zoning, or how they define the area for the one-million-people-plus towns. Like some satellite towns, they may not qualify to be over a million...how will it impact Noida and Gurgaon vis-a-vis Delhi, how will [it] be treated is the question to ask. This is all in the nitty-gritty and fine print.

ENLARGE

Anand Ramanathan

Deals India: Considering the low deal volumes so far this year, do you think that this proposal is likely to improve deal figures for 2011?

Mr. Ramanathan: On the FDI front, the size of the retail market is about $400 billion, about 5% is organized, so even if you take a cut of 10% in three or five years it will bring in a sizeable volume as FDI in retail and given this announcement I think that all the people will be interested, all large multi brand retailers across the world will want to enter the country in some form of the other.

Deals India: From your interaction with clients how would assess the reaction of the industry to this policy?

Mr. Ramanathan: In terms of timing I think it's sooner than expected, so over all there has been a fairly optimistic reaction to this, and there hasn't been so much of an opposition from the Indian retail trade either because they also see certain advantages in the whole supply chain ecosystem improving and infrastructure coming in which will reduce costs for everyone. Whatever resistance there has been has been very neutral, except for a few local trade associations, not too many people have really said anything negative or opposed it.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.